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raymondusa (raymondusa)
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Beijing's leverage over Taiwan

Taiwan is heavily dependent on China.  Some would even say Taiwan has an unhealthy reliance on China.  It is currently exporting about 37% of total exports to China, with USA a distant second at 15%.  Taiwan is only importing about 12% from China.

However, China is not dependent on Taiwan.  Here are the numbers for 2004, as 2005 is not available yet.  China exported to US 21%, Japan 12.4%, South Korea 5%, Germany 4% of total exports.  Another words, exports to Taiwan were so small that it didn’t even show up in the export distributions.  Import for 2004 was Japan 17%, Taiwan 12%, South Korea 11%, US 8%, Germany 5.4% of total.

This makes sense because China is already the third largest economy (PPP) in the world.  What is huge trade to Taiwan is relatively small to a much larger economy like China.  The relative size difference is the reason China has leverage over Taiwan.

Upon closer examination, the 12% imports from Taiwan include both goods and services.  China does import from Taiwan, high tech and other services mainly via Hong Kong.  If you only count the goods, the import number is actually less than 12%. China does benefit from high tech via Taiwan, but Taiwan is clearly not the best in high tech.  Japan and South Korea have a well deserved reputation for being the most high tech countries and China can do better with those two countries (trade, learn the new technologies, creating the manufacturing infrastructure to make the high tech products and services, etc.)  Therefore, China can certainly go elsewhere to get the high tech help, and offer as an incentive, access to its huge domestic market, and I think it’s a safe bet it will have no problems finding help around the world.  Looking at the trade distributions (both imports and exports) its clear that while China do benefit from high tech trade with Taiwan, it has other avenues to replace it if necessary. Imagine a China import trade distribution like this:  Japan 18%, South Korea 13%, US 10%, Germany 8%, and Taiwan 6%.  If China wants to add India into the mix and import say 4%, then Taiwan can even get less than 6%.  Since some people are emphasizing high tech, it is smart for China to work with the best, and most high tech countries, namely Japan and South Korea.

I am mindful that China is a manufacturing juggernaut, and I haven’t even mentioned manufacturing durable goods.  When you factor that into the mix, well you should be smart enough to get the picture!

If that is not enough leverage for you, how about financial leverage.  China is on pace to have the largest currency reserve in the world.  If you count currency swaps, it is essentially equal to Japan and most likely overtake Japan this year.  What does that mean?  China has enough financial liquidity to move interest rates, and move markets as we saw last July.  Furthermore, it’s basic finance that those who have savings (China’s liquidity) have leverage over those who have large debts, as China is a world lender.  As Taiwan’s debts increase, it is more vulnerable to lost of financing!

Lastly, China can also influence other countries not to do business with Taiwan should it threaten independence, because they can cut off access to China’s markets.  That is a large penalty that China can use to maintain the regional dynamics.  If you look at how the Taiwanese businesses reacted after CSB’s New Year’s speech, and the internal discord (four premier and counting), and the fact that the legislature is making CSB a lame duck, despite his efforts to counter it, the smart Taiwanese people clearly understand what is practically at stake!  All the political rhetoric and ideology doesn’t change that.  As I wrote before, practical reality trumps political ideology, as we are see more and more examples of just that!

[ Last edited by raymondusa at 2006-3-26 09:19 PM ]

2006-1-19 03:42 AM

raymondusa (raymondusa)
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All this talk about Taiwan independence and yet, when confronted by the numbers, and very real issues that reflect the political and economic dynamics of the region and the world, their silence tells me they don’t have an intelligent factual retort! Talk is cheap! Rhetoric is cheaper! Political ideology is cheapest, especially when people have real responsibilities and must face the real world, with real issues, real practical problems, and make practical tradeoffs!

2006-1-20 04:59 AM

cuihaoying
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Boost!

2006-1-20 08:20 AM

cuihaoying
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support!

2006-1-20 08:21 AM

cuihaoying
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Brag!

2006-1-20 08:21 AM

twchinese (twchinese)
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china's leverage

raymond, i agree to the fact that taiwan's economy is growingly dependent on china, based on the export statistics. the argument i was making from the beginning is that china also needs the presence of these taiwanese companies for employment, management of labor, and technology transfer.

as you know, china produces more than 6 million university grads every year, and about a third of them are unemployed because there simply isn't enough companies in china to employ that many people. i'm sure you've seen how crowded those job fairs are in shengzhen and shanghai, and how many of them go home empty-handed. taiwan's net annual investment in china may seem little compared to the US, EU and Japan, but it is substantial and Taiwanese companies or Chinese companies owned by Tai-Shang do employ a huge number of people. Imagine the social chaos it would cause if all these people are suddenly laid off. Riots due to corruption and unemployment are frequent in many parts of China, even in the relatively wealthier south... these are all the signs of china's social problems, which you can't ignore. and for that very reason, china need these taiwanese companies to stay in china.

you also talked about how Japanese and Korean technologies are superior, which they are, in certain fields, and not others. for example, taiwan currently still is the world leader in the production of the smallest chips (90 nanometer technology). by 2010 china's fabs will only be able to produce 10% of the chips for its domestic market so you know where the rest of them have to come from... again it's true that the taiwan economy is dependent on china's demand, but then which one of the 4 dragons isn't? another technology is the tft flat panel, which taiwan's chimei and korea's samsung actually share (exchange) many of the key patents... the only difference is korea's samsung is much better known. and if you want to talk about tech transfer from japan, you can dream on... the japs are extra-cautious when transfering bottleneck technologies to chinese companies. the best way for china to catch up to the knowledge-based competition is to attract more Hai-Gui's, like those Qinhua and Beida engineers who got their PhDs in the US. China's Dopod is the best example of what chinese people can achieve when they actually choose to come home and not become white people's lab rats.

2006-1-24 03:47 AM

raymondusa (raymondusa)
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twchinese:

That was a reasonably fair posting.  I think it is pretty clear that Taiwan needs China to survive economically.  When I write about soft power, and cutting trade, that is really a last resort situation where China is out of diplomatic options.  It’s something to do reactively and reluctantly as a last resort, and is still better than using hard power, or military options.

Unlike others that talk political ideology, I rather focus on what can realistically give us peace in the region so everyone can prosper together.  Taiwan should realize the interlopers are using it as a proxy to undermine China, and truly don’t care about democratizing Taiwan (just look at the interlopers' hypocritical foreign policies around the world in undermining and overthrowing democratically elected governments).

The recent voting in Taiwan showed me Taiwanese are smart practical people, as they created executive and legislative gridlock, to maintain status quo for now.  I cannot argue with the wisdom and timing of such actions, since I too, feel that is best for now.

2006-1-24 08:47 AM

iluv2fish (iluv2fish)
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We are all lab rats...

"and not become white people's lab rats."

..or computer rats, or medical rats or...you get the point.

You must ask yourself why, with all that is good in China....no one wants to go there. Now I
do not mean "no one" but many people, for some reason (you are smart and can figure this
out), ...do not want to like under the Chinese system.

I understand you are good and honest people. You Chinese are hard working and family
people. I think the reason you are having a brain drain is not because of the Chinese people
but because your Chinese government.

Figure out why. Ask around...do some research and maybe just maybe, if you are nice...
Taiwan may help you find the answer.

2006-1-24 11:26 AM

greendragon
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You are wrong, Mr. Fish....

...many people wants to go to China..

but who want to live in AUTHORITARIAN states.......

Taiwan has been capitulated..the answer as your American Chinese citizen Mr. Raymond has pointed out.....CHINA MARKET.....compredo!

Tell me more Irish jokes! Mr. Fish!

fm
Green Dragon.

2006-1-24 11:38 AM

chinadaily (chinadaily)
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It's money, stupid!

Taiwan posted a trade surplus of $58 billion with the mainland last year. The island's accumulated trade surplus of $330 billion in the past years with the mainland eclipsed Taiwan's foreign exchange reserves of $253.3 billion at the end of December, 2005.

2006-1-24 11:07 PM

#10

lau_guan_kim (Lau Guan Kim)
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QUOTE:

Originally posted by chinadaily at 2006-1-24 23:07
Taiwan posted a trade surplus of $58 billion with the mainland last year. The island's accumulated trade surplus of $330 billion in the past years with the mainland eclipsed Taiwan's foreign exchange reserves of $253.3 billion at the end of December, 2005.

Money is not the be-all-end-all for any country worth respecting. It is the system of government and political dissimilarity that concern Taiwan most.

I hope we do not have this kind of carrot dangling. China has to know the genuine fear of the average Taiwanese.

We should not use money as the political currency to buy allegiance.

Lau Guan Kim
Singapore

[ Last edited by lau_guan_kim at 2006-1-30 11:50 AM ]

2006-1-26 03:03 AM

#11

raymondusa (raymondusa)
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LG Kim:

I agree with you that money is not the end all, be all.  But allow me to give you another perspective.

In an ideal world, I would love to see my Chinese sisters and brothers on both sides of the Straits peacefully co-exist, work together for the common good of China and the world, and see the interlopers for what they truly represent.  But being idealistic is not a luxury everyone can afford.

In the real world, sometimes we don’t have an easy decision between actions that lead to a great outcome versus actions that lead to a bad outcome.  When results can vary from great to bad, the decision leading to the result, is relatively easy, all things being equal.

There are times when the decision is not so easy, when results can vary between a horrible outcome like a military war leading to many dead people, or an outcome that one can live with, even if it is not ideal.  There are people who make these practical decisions daily somewhere in this world, balancing their practical needs, with the practical tradeoffs they are willing to live with and make.

Taiwan is facing those practical tradeoffs now, and while financial and political leverage over Taiwan may not be ideal to bring forth a peaceful resolution, the punitive alternatives are even less desirable.  I don’t offer the punitive alternatives as a negative comparison to make the practical tradeoffs look better, but I’m confident my fellow Chinese can choose the path they can live with, even when it’s not ideal.

Lastly, I invite you to read my article “A Plan for Peace”. It’s not an ideal solution.  But I tried to balance the issues most important to both sides to offer a potential and peaceful resolution.

2006-1-26 05:46 AM

#12

hanlei (Magic)
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the door is being shut down

Very persuasive and powerful post,  Ray.

Not only does mainland China have trade, economic and growing political leverages over Taiwan (everybody knows that Sino-USA relationship is now fair and sound, based on growing common interests,  and,  lately Mr Bush has made clear to C.SB that the no-independence line must be obeyed).  But also,  with a near-full deposit of money, China's defense capability is being strengthened.

So, the door for C. SB or any other stupid person to engage in secession of China's Taiwan is being effectively shut down.

yes, Ray, I agree that  practical tradeoffs will be much better than violent showdown. And, carrots are always better than batons, right?  The Real Chinese people, both on the mainland and the island, will keep their patience and wait for another 10, 15 or 20 years for the peaceful integration.

No hurry,,,,,

[ Last edited by hanlei at 2006-1-26 02:47 PM ]

2006-1-26 02:46 PM

#13

lau_guan_kim (Lau Guan Kim)
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Reply #12 raymondusa's post

QUOTE:

There are times when the decision is not so easy, when results can vary between a horrible outcome like a military war leading to many dead people, or an outcome that one can live with, even if it is not ideal. There are people who make these practical decisions daily somewhere in this world, balancing their practical needs, with the practical tradeoffs they are willing to live with and make.

At times I wonder how England could let go America, Canada, Australia and New Zealand?

Over dinner table, my discussions with intelligent people elicited this observation.

Either China accept that Taiwan will be on its own and tie that link with a commonwealth, or taking an intransigent stand that will bode disastrously for peoples on the two sides of Taiwan Straits.

I just heard somewhere upstairs that with new-found wealth China’s defence capability has enhanced and therefore the roadmap to war in the Straits is affordable. Such jingoism is both dangerous and callous.

Just remember how this new found wealth comes about? The first option is economic sanction, for the trading with both the US and Japan has given China that wealth from the backbreaking toil of its hardworking people. It is precisely this sort of jingoism and rhetoric that will drive the US, Japan, and most of the West to build up India and Vietnam to check the growing belligerence and rise of China.

The other option is total annihilation of China’s cities, industries and war production capacity. We see the thinking of such Chinese bigots does not factor in what I already discussed. The combined technology, industrial might, and economic clout are awesome. Claim that China is technologically strong precludes the tandem matching from the other sides with even more frenetic pace and abundant resources to come out with the ultimate weapon of destruction.

So war is morally an unacceptable option to many Overseas Chinese vis-à-vis Taiwan. What if China assailed Taiwan, will there be future irredentist claims that brook no opposition? It would be a perception that China may claim a state as once theirs and stick to their guns with a roadmap to war?

Hence the outcome that one can live with. Do we sensibly think for a moment Taiwan would want to live under communism which it disdains because wealth is important to them? I think in all plausibility they rather live without fear and materially poorer. But I doubt the US and Japan will ever abandon Taiwan.

Patience is a Chinese virtue. It took China 369 years to reunify after the decline of Han Dynasty. What would another fiftyyears or hundred years be any different for the reunification or unification of Taiwan?

QUOTE:

Taiwan is facing those practical tradeoffs now, and while financial and political leverage over Taiwan may not be ideal to bring forth a peaceful resolution, the punitive alternatives are even less desirable. I don’t offer the punitive alternatives as a negative comparison to make the practical tradeoffs look better, but I’m confident my fellow Chinese can choose the path they can live with, even when it’s not ideal.

Looks like a catch-22 situation for both parties.

The destruction to lives and properties is the inevitable outcome if punitive alternatives the only options. Bear in mind, there are more losses for China. If second or third parties are involved, China will be set backwards many decades.

Taiwan may be obliterated or survived with crutches.

For China it is also she has to live with her decision. Standing on the side are a stronger India and Vietnam. Can she live with it?

The strongest link to this unity of the two people in the Taiwan Straits is the sharing of same culture, language and a common ancestry.

I may not live to see the two sides reunited or united.

That is the wish of the Chinese Diaspora. No war but patience and understanding.

[ Last edited by lau_guan_kim at 2006-1-27 04:04 AM ]

2006-1-26 11:22 PM

#14

raymondusa (raymondusa)
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LG Kim:

When you wonder why England could let go America, it implies England had better choices.  Perhaps the answer is the same as why England let HK go.

Some human nature characteristics, like ego and pride, fuels Jingoism.  As long as there are humans, there will be human nature, and all the things that come with it, like Jingoism.  We have it here in the USA, and you have there in Singapore.

Some hawkish people wrote that China and or USA could use its military as hard power to achieve their goals.  This is not the best path since no one wins.  Look at the current problems USA face in Iraq, with increased deaths, military cost, occupation cost, and diminished moral authority around the world.  That’s not something China should copy, and it should be wise enough to learn from USA’s mistake.

As far as moving operations to India, USA and Japan are two large economies, largely unhealthy economies. They depend on China’s domestic economic consumption to buttress their own economy.  If they could move to India, don’t you think they would have already?  The reason why USA, Japan, and other countries are investing in China is to capture part of the domestic consumption.  China has a domestic savings rate of about 40% of GDP.  India doesn’t have that.  In order to get into the Chinese market, you must first invest into it!

USA has the worst aggregated debt ratio by absolute dollars, and Japan is second worst.  The IMF warned, USA is careening towards insolvency.  John Snow asked Congress to raise the national debt ceiling, which was set at 8.1 trillion dollars.  Ben Bernanke will become the Federal Reserve Chairman in a few days, and his solution, print more money.  Notice that Central Bankers around the world are moving more to gold, and away from the dollar.  The days of cheap foreign financing for US debts are going away too! Bernanke’s idea to handle the largest debt in history is to devalue the dollar to devalue the debts.  A good first year economics student understands this will increase the cost of future borrowings, and increase interest rates, and interest sensitive industries like real estate will suffer.

The Fed also stopped printing the M3 report, which was a way for investors to know the amount of money supply.  Smart investors should know this move means the Fed is getting ready to dump a huge amount of printed dollars onto the market when Bernanke takes over.  Interest rate will go up because of this, and USA will need cheap foreign financing to keep interest rates manageable.

Congress loves to bash China because of the trade imbalance but it doesn’t credit China for providing cheap financing to keep our interest rates low.  As the debt problems get larger because of systemic long-term budget deficits, USA becomes more and more dependent on China’s financing, so it is in USA’s best interest to keep China as a friend.  Bernanke may not have a better choice since he cannot depend on Americans to save and self-finance the US debts and deficits.  Pay attention to the markets, and I think you will find out what I’m predicting here, will come true in the months ahead!

Since you are in Singapore, I don’t expect you to fully understand the real problems the US economy is facing now, and will face ahead.  But if you would like to learn more about the US economy, I recommend “Running on Empty” by Peter Peterson.  BTW, Peterson is a Republican.  Not that it matters, but for some people who use a partisan filter in the USA, it could have some bearing on how they receive this book! As far as I’m concerned, it does not matter to me if Peterson is a Republican, Democrat, Independent, or whatever.  It does matter to me when he is right!

2006-1-27 07:46 AM

#15

arthur (arthur)
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queries ?

Excellent explanation, RaymondUSA.

But, US' annual GDP has hit 11.8 trillion dollars (compared to China's 2.3 trillion), isn't this huge economy turning enough tax revenues for the Secretory of Finance, Mr John Snow? or, are you saying that the government revenue cannot match the pace of government consumption, esp servicing the Iraqi battleground?

And, china's domestic saving rate is projected at 45% of its GDP, what is the rate for the United states? Are american citizens buying their own government debt papers? (here in China old people queue in long lines to buy)

And, with rising deposits of the savings and foreign hard currency reserve, will China somehow have more influence to rein in irresponsible voices bashing China in DC?

2006-1-27 04:48 PM

#16

raymondusa (raymondusa)
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arthur:

Quoting the annual GDP figure is really misleading.  It’s like telling someone only your income and assets, without telling them your expenses and liabilities.  GDP is just one figure, and given the various problems with calculating it (deflator used, included activities, excluded non-market activities, reporting delays, non-finished goods, uncalculated private sector transactions, etc.) it is not the best indicator of a country’s true economic health.

GDP also doesn’t take into account currency differences, and cost and price differences in different countries. That’s one reason economist developed the Purchasing Power Parity (PPP) to at least try to improve the economic calculation to more realistically reflect the true economic health of a country.  Even PPP has its own problems like it can vary based on the specific goods used for calculation, preferences from country to country, quality of goods, barriers to trade like sanctions, tariffs, duties, etc.  But in the absence of anything better, if you must use GDP, at least use the GDP (PPP) figures, as it is closer to reality.

The 2005 numbers are not yet available.  But here are the 2004 numbers GDP (PPP).

International Monetary Fund calculations

1 European Union 11.72 trillion
2 USA 11.60 trillion
3 China    7.33 trillion
4 Japan    3.81 trillion
5 India    3.29 trillion

World Bank calculations

1 European Union 12.02 trillion
2 USA 11.62 trillion
3 China    7.12 trillion
4 Japan    3.77 trillion
5 India    3.36 trillion

Let me give you a quick example using my relative.  I send my relative in rural China $1000USD every year.  That works out to over 8000 RMB and she tells me it is enough to pay for all her living expenses for the year.  In contrast, that same 1000USD pays for one week of my home mortgage.  There is a big difference in cost of living, price of goods and services, and currency exchange as illustrated by my example. Therefore, the more accurate number to use is GDP (PPP).

Deficits are Income Statement related.  Debts are Balance Sheet related.  Some people unknowingly use Deficits and Debts interchangeably thinking it’s the same thing.  Deficits can measure daily, quarterly, and or annual shortages where expenses are greater than the revenues generated.  According to our National Debt Clock, we  are currently running a 2.18 billion dollar deficit, EVERY DAY! Our expenses exceed our revenues every day, creating daily deficits.  The National Debts are an accumulation of those daily deficits.  We now have a National Debt at 8.1 trillion dollars and growing.  Just to give you some perspective, the interest cost alone on our National Debt (and I’m not even talking about being able to repay the debt itself) is more than the annual cost of the entire USA educational system.  This fiscal mismanagement is just the tip of the iceberg.

The Baby Boom generation, which is the largest generation at 72 million people, are beginning to retire.  The projected Social Security and Medicare cost if all the Baby Boomers just live to their actuarial age is about 40 trillion.  As medical care improve longevity and people live even longer, those actuarial projections take it up to 70 trillion dollars.  If I just take Social Security and Medicare, that cost makes the 12 trillion GDP look like nothing.  We also have unfunded and or under funded pension plans in USA.  If someone is thinking they will retire happily on their pension, they may have a rude awakening too!  The PBGC (established by ERISA to insure the US private and public pension plans) may collapse by under funding.

It’s already bad enough when I only talked about the unhealthy state of Social Security, Medicare, and Pensions, and I didn’t even get to the rest of the problems. Just understanding these numbers should help give you a better idea of the economic troubles ahead!  Read Peterson’s book if you are interested in more details and a more eloquent explanation!

As far as the domestic savings rate, China varies from 40-45% depending on which numbers you are using.  USA varies from 1-5%.  Another words, there isn’t really enough domestic savings in USA to offset the financing needs of the country.  That’s why USA is becoming more and more dependent on foreign financing, and as such, its leverage around the world is decreasing.  Central Bankers around the world not only hold huge amounts of currency (over 1.6 trillion dollars with Japan and China alone), it also holds the liquidity that is much needed since US is running deficits daily, and adding to its existing debts.  This leverage that world Central Bankers have over the US is one reason, geopolitical issues around the world will increasingly be influenced by financial leverage, instead of military prowess.

History is filled with omnipotent Empires that imploded and is no longer around, because they overreached, overextended their influence, overtaxed their own economies seeking world hegemony, and made the mistake thinking human conquest could conquer human nature!  Hopefully, all countries today will be smart enough to learn from these historical failures, and not need to repeat these failures by personal experience!

[ Last edited by raymondusa at 2006-1-27 05:24 PM ]

2006-1-28 08:27 AM

#17

jimmy67 (jimmy67)
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devaluing dollar?

Since U.S. is running such high a deficit each day, and it is more and more relying on foreign financing, why cannot the Federal Reserve print more greenbacks: (1) to let dollar devalued to make U.S. made goods more competitive on the world market, (2) to dilute the value in the hands of China & Japan, which hold trillion dollar paper bills? do you mean the Federal will fear the rise of Inflation in the united states? But two merits are bigger than one shortcoming, right?

2006-1-29 11:49 AM

#18

raymondusa (raymondusa)
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jimmy67:

It's a myth that devaluing the dollar is a way to deal with the deficits and debts.  There are many historical examples showing how disastrous it can be to print money as a way to deal with deficits and debts.  I use history to share relevant examples and to learn from history, so hopefully US do not make the same mistakes.  That is certainly better than speculating about US economic future with no supporting historical foundation.

Let me give you some historical examples, as you can study these historical examples of hyperinflation and the events leading up to it.  You will find there are some scary similarities between these examples, and what USA is currently facing.  Example of hyperinflation include France 1789-1795, US Civil War 1861-1865, Germany 1920-1923, Russia 1921-1924, Austria 1921-1922, Poland 1922-1924, Hungary 1922-1924, Greece 1943-1944, Hungary 1945-1946, Argentina (Austral Plan 1985), Brazil (Cruzado Plan 1986), Yugoslavia 1993-1994 (Tito).  Tito felt the answer to his country’s problems was just print money.  We know what happen to Tito and Yugoslavia, right?

Ben Bernanke will be the new Federal Reserve Chairman soon.  When a new Fed Chairman takes over, the market will usually test him, and I expect he will be test quickly.  Will he sacrifice the purchasing power of the dollar?  Will he fail to learn from these historical examples and be a historical disaster like the examples above?

Here are some reasons not to devalue the dollar:

1. More expensive future borrowing on existing debts and deficits.

2. Reduced purchasing power of the dollar means US Americans will suffer more as the dollar buys less.

3. Hyperinflation can ensue just like historical examples above.

4. Decrease demand for the dollar as Central Bankers look to other stronger currencies, and alternatives for their reserve portfolio.

5. Decrease the good faith and credit of the US as a world reserve currency, and hasten Central Bankers to rebalance away from it.

6. A myopic scheme that will hurt the US economy long term, when it doesn’t deal with the real problem.

7. Doesn’t address the real problem of lack of savings, and the ability of Americans to self-finance and not rely so much on foreign financing, thereby losing more leverage daily.

8. Doesn’t address the real problem that American goods may not generate enough demand for the dollar worldwide, thereby weakening it further.

9. Doesn’t address the real problem of systemic long-term financial problems within the US.  When Social Security, Medicare, and Pensions are in deep trouble, devaluing the dollar will reduce American purchasing power and make a bad situation, worse.

10. Interesting sensitive industries like real estate and all the allied industries like building, construction, suppliers, etc. that depends on a robust real estate economy will also suffer as interest rates goes up.

11. Suppliers of goods and services will need to increase prices just to stay even with inflation and not allow it to eat away their profits.  This is a double strike as consumers will have less purchasing power from a devalued dollar, and face higher prices for goods.

12. Consumers will also feel the pinch of a devalued dollar as they increasingly look to price leaders like Wal-Mart to buy what they need.  This in turn will further erode demand for the more costly US produced goods, and further erode what is already a sick manufacturing base.

13. Countries like Japan and China provide cheap financing to the US because it also gets some great benefits like trade surpluses.  If US were devaluing the dollar, it will reduce the incentive for Japan and China and all the other Central Bankers around the world, to continue providing cheap financing since the dollar cannot maintain its strength and purchasing power.

14. Since the Euro is a viable currency alternative, if the dollar is devalued long term, don’t be surprised that Central Bankers around the world move permanently to stronger currency alternatives.

15. As Iran implement its bourse, and others will either do something similar or use Iran’s bourse, there will be a greater need to use a stronger currency like the Euro as the instrument of trade, since the currency risk of a weaken dollar is just poor business.

16. In the horizon, I can even see a potential AU, with China and other Asian countries getting together like Europe to create a united block of economies based on one currency, and this AU currency can be a third world reserve currency.  Therefore, it is more important for US to maintain the strength of its currency and retain the faith of world Central Bankers so US it can still be a world reserve currency.

17. Oil transactions are in US dollars for now, because of the perceived strength of the dollar backed by the full faith and credit of the USA.  If US are going to devalue its dollar long-term and continue increasing its deficits and debts, it will destroy its credit, and undermine the world’s faith in the dollar.  Therefore, that will hasten the world to find, use, and adopt viable alternatives like a bourse, barter agreements, and other market mechanisms that eliminate and or mitigate dollar currency risk.  This would be a major reason not to devalue the dollar as US doesn’t need to give the world more reasons to dump existing dollar holdings and stop buying new dollars denominated assets.

[ Last edited by raymondusa at 2006-1-30 09:48 PM ]

2006-1-31 09:17 AM

#19

arthur (arthur)
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more queries

Many thanks, Ray.

You are telling the world, esp amricans and Chinese, that China is gaining more leverages in its hands.

That is said, will Congress make it to law that for the past 2 years, a few Senators were threatening to impose 27.5% carpet punitive tariff on all Chinese imports? And, if the economic relationship runs foul, as the law is enacted and enforced, what do you think, will be China's responses, and their aftermath on the 2 huge economies? Thanks a lot.

[ Last edited by chinadaily at 2006-2-7 10:58 AM ]

2006-2-5 11:48 AM

#20

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